Is automated KYC enough to stop fraud?

Reports of fraud are increasing. Moody’s Analytics GRID database reported an increase in fraud risk alerts from 72,500 in the six months from October 2021 to March 2022 to more than 88,000 in the six months from April to October 2022. New digital KYC solutions target fraud, but are they enough?

Efforts to fight fraud and financial crime are evolving all the time, but so are criminal practices. Organizations need to understand whom they are working with and the risks of working with them. But reported fraud alerts continue increasing each year. The Telegraph newspaper recently went as far as to say: “Fraud is set to be upgraded as a threat to national security, giving it the same status as terrorism.”

Criminals tend to use repeat tactics, which means certain types of fraud are uncovered more often and that affects the statistics, but even so, instances appear to be increasing. Moody’s Analytics GRID database reported an increase in fraud risk alerts from 72,500 in the six months from October 2021 to March 2022 to more than 88,000 in the six months from April 2022 to October 2022.

Even though large amounts of time, resources, and innovation are dedicated to preventing fraud and money laundering, they aren’t impacting criminals as much as organizations would like. “The public sector may be losing more than £40 billion and individuals around £7 billion” per annum according to a UK government report issued in May 2022. Regulators, organizations, and technology providers continue to make progress, but this is a war not a battle and it’s being fought on many fronts.

Has digital transformation led to growth in fraud?

Perhaps it’s naïve to expect the war against fraud could ever be won. The nature of criminals is to see a chink in the armor and adapt their plan of attack.

Even so, when it comes to fraud prevention, organizations have faced headwinds due to digital transformation, which continues to expand rapidly. Digital-first and digital-only services have boomed over a relatively short period of time and have been fueled by the pandemic. This has meant there are simply more ways to commit fraud opened up online.

Similarly, there has been more cross-border criminal activity, with organized crime groups exploiting an increasingly borderless world. GRID reports an increase in organized crime alerts from +17,000 between October 2021 to March 2022 to +18,000 between April and October 2022.

Solving fraud challenges

It’s incumbent on organizations to know their customers and to stop their systems and infrastructure from being used to commit crimes. Regulatory scrutiny has driven standards and information sharing has also improved. Yet, even with new and stringent rules, criminals find ways to evade. For example, the Guardian newspaper reported in May last year that “…of the 4.9 million companies that were registered with Companies House as of March 2022, experts believe that as much as 20% of the data related to them may be false.”

Improved access to diverse, quality data coupled with regulatory technology are playing their parts in making KYC more efficient and effective. Automation of processes integrated with robust, risk-relevant data are available to organizations to help them understand whom they are working with and the risks of working with them – essential to fraud prevention.

Automated KYC – pros and cons

While there is no doubt automating KYC processes can help prevent fraud, is it enough? Or can automation be taken too far?

In the summer of 2021, for example, the UK Financial Conduct Authority (FCA) issued a Dear CEO letter, which brought to the attention of banks some of the common failings around basic financial crime compliance. Part of the letter is centered on automation.

The gist of the letter is - yes, it’s fine to have AI and data analytics, but it’s still important to do the basics. Know your customer; understand your client, otherwise automation simply introduces more risk because people sit outside an algorithm or suspicious activity that goes undetected.

Again, technology is good at making KYC processes more efficient, but 100% automation is rarely optimal when it comes to understanding and identifying criminals and the nuance of how they operate.

Optimizing KYC

KYC and counter-fraud processes can be optimized through automation. Automating fraud, AML, PEPs, and sanctions checks using integrated datasets is more efficient than manual processing. Having a compliance professional attempt to undertake daily sanctions checks for example would be inefficient and prone to error.

Fraudsters can employ repeat activities they have found successful in the past, such as fraudulent loans and grants, claims fraud, tax fraud, and supplier fraud. As automation is good at identifying patterns, repeated types of fraud can be spotted by machines. But criminals tweak and evolve practices, so identifying a new type of fraud risk may be harder for AI to spot, so professionals can be invaluable in detection.

Automation helps optimize data processing and can trigger alerts, but people and their investigations are crucial to understanding the difference between customers and criminals in a nuanced way. There is a balance to strike between deployment of technology that can do the basics of KYC and ensuring compliance professionals carry out enhanced due diligence and make risk-based decisions using evidence and experience.

Get in touch

Moody’s Analytics is transforming KYC, creating a world where fraud risk is understood so decisions can be made with confidence.

Our customers build their own unique KYC ecosystem using our flexible workflow orchestration platform, leading datasets, analytical insights, and integrations with global providers to create solutions that help stop financial crime.

Get in touch any time to talk about your fraud prevention program – we would love to hear from you.